Over the last few months, both S&P Global (SPGI) and Moody’s Corp. (MCO) shares have sold off. I’ve been trying to understand the recent poor investor sentiment.
One guess is the changing U.S. interest rate environment. U.S. interest rates have been so low and so favorable for businesses to issue debt. Now with rising rates the rate of issuance for corporate bonds will slow or even decline. Rating bonds is a big part of both S&P Global and Moody’s business. Less issuance means less bonds to rate and lower revenue for both companies.
What happened to U.S. bond issuance during previous periods of rising interest rates? Did issuance decline?
The chart below is total outstanding U.S. bonds both corporate and government. The chart goes back to 1980.
During this time I counted 4 periods of rising interest rates: 1980-1982, 1987-1990, 1994-2000, 2002-2006. I highlighted these periods on the chart below with a blue square.
In the recent past, rising rates did not affect total bonds outstanding. Total bonds outstanding grew during all four periods. Companies and the government, both local and federal, kept issuing bonds.
The chart below focuses solely on U.S. corporate bond issuance. Unfortunately, it only goes back to 1996. It only includes 2 rising interest rate periods.
Rising rates did not affect corporate issuance. It took the Financial Crisis and a shut down of the credit market to really affect issuance.
We are coming off 0% Federal Funds rate. It is a different scenario then the recent past. A lot of companies took advantage of the low rates to issue new or refinance older higher cost debt. Maybe issuance will be affected more this time around.
Companies will still need debt financing to fund their business or to refinance maturing debt. I don’t expect local and Federal governments to cut back on excess spending any time soon. They too will need to keep issuing debt to fund their spending sprees.
Also, these two charts only cover the U.S. Both S&P Global and Moody’s rate bonds globally.